“Failure is the opportunity to begin again more intelligently.” – Henry Ford
It’s no secret that a bankruptcy is one of the worst things that can happen to your finances and credit history.
So that’s the bad news…
The good news is that a bankruptcy is also not the end of the world. Thankfully many people get a second chance.
This article will help you get a better understanding of your refinancing options on your journey to reestablishing your new credit history.
Here are six potential ways to benefit from a refinance after the bankruptcy dust has settled. You will also learn how soon you may be able to take advantage of these options with three different loan programs available today.
6 Ways (and reasons) to Refinance Your Home after a Bankruptcy
1. Lower Your Interest Rate
If your existing mortgage loan has an interest rate of 6% or higher, you may be able to take advantage of the lower fixed interest rates available today. Currently the average mortgage rates are right around the 4% range for well-qualified borrowers.
Given the fact that you have a bankruptcy in your past, you might fall in the range of 5% or higher.
If you meet the lender’s credit guidelines, the new interest rate they offer you will depend on your actual credit scores at the time of application. The lower your credit score, the higher the rate.
You will need to get an accurate quote from your local bank or mortgage lender to see if it would be worth your while to try refinancing now or postpone the process until your credit profile is stronger.
Rates will eventually rise again, so it’s definitely worth a shot to look into your options now. You should not have to pay any fees to have a loan officer do a pre-qualification for you.
Here’s a look at The History of Mortgage Rates to give you an idea of the market trends.
2. Lower Your Monthly Payments
The key term here is ‘monthly payments’. This does not necessarily mean lower interest rate.
This can be accomplished a number of ways:
- Consolidating your 2 current loans into 1 single mortgage loan. For example, if you have a mortgage loan and an equity line of credit, you might be able to consolidate both loans into one new loan with only one monthly payment.
- Consolidating your current mortgage loan AND other monthly debts. We would hope that you wouldn’t have many outstanding debts after your bankruptcy, but I’m throwing this idea down just to make sure we cover all our bases. Perhaps you may be wishing to pay off some other debt that is not in your name – like a child’s car loan or student loan perhaps?
- Suppose you currently have a 15-year fixed rate mortgage on your property. If you refinanced into a new 30-year loan, your payments would drop. This is because the principal and interest payments are lower on a 30-year term compared to a 15-year loan. Granted, you would extend your current mortgage debt over a longer period of time, but you would have the benefit of a lower monthly payment.
- If you have a lot of cash available (or access to cash) you might be able to pay down a significant portion of your home loan balance and refinance into a new loan amount for 30 years. Let’s assume you owe $250,000 on your loan. If you could pay down $50,000 in cash at closing, you might be able to take out a new 30-year mortgage for only $200,000. The payments would now be lower because they are based on a $200,000 loan instead of the original $250,000 that you owed. (Ask a loan officer to run some calculations for you)
3. Reduce the Term (years) of Your Mortgage
If you took out a 30-year fixed loan five years ago, it means you still have twenty-five more years to go before you pay off your home.
(Most loans only last a couple of years, but we’ll assume you go the distance.)
Do you plan on living in your home for the long haul? If so, you could get a jumpstart on paying off your mortgage balance faster by refinancing into a new loan with a shorter term.
If the monthly payments on a new 20-year mortgage can fit within your budget, this option might make a lot of sense for you. By refinancing into a 20-year term, you would be able to knock 5 years off of your original timeframe for paying off the original 30-year mortgage.
You currently have 25 years to go on your existing loan, but you can take a new loan for only 20 years. This will help you pay off the loan quicker and potentially save you thousands of dollars in interest payments over the life of the loan.
If you went for a new 15-year loan, you would then be 10 years ahead of schedule. The tradeoff is that a 15-year mortgage will have a higher monthly payment than a 20-year mortgage.
(The 20-year mortgage isn’t very popular, so be sure to ask your mortgage guy or gal about it.)
4. Remove Mortgage Insurance From Your Current Loan
If your original mortgage amount was greater than 80% of the property value, you most likely have some sort of mortgage insurance on your loan. This is commonly known as Private Mortgage Insurance or PMI.
You should know if you have mortgage insurance or not. This is not your regular homeowner’s fire and hazard insurance, but an actual insurance for the loan.
Not sure? Check your current mortgage statement that you receive from your lender. Look for a charge for a mortgage insurance premium.
Still not sure?
Try logging into your account if you have online access to your mortgage details.
If all else fails, call the customer service number to speak with a representative at the bank where you currently make your mortgage payments. This should be a toll-free number.
If you believe that the current loan balance (the amount you still owe) is approximately 80% of the current home values in your neighborhood, you may have a shot at getting rid of the mortgage insurance payments.
For example, if you currently owe $80,000 on your mortgage, the property values should be $100,000 or higher. ($80,000 is 80% of $100,000. This is the Loan-to-Value ratio used by lenders.)
You can get an idea of current home values at Zillow.com
5. Remove a Co-Signer From Your Current Loan
This is a common transaction for a refinance.
In my experience, purchasing a property is almost always tougher than a refinance. As a result, many first-time home buyers need help from a family member to serve as a co-signer or co-borrower in order to make the purchase possible.
A few years down the road, the actual home owners try to refinance in order to take the co-signer(s) off the loan. This is a very smart move because it relieves the co-signers from their financial obligations for that mortgage. This assumes that the home owner can qualify for a refinance based on their current income alone. (No more co-signers, remember?)
Aside from meeting the income requirements, the home owner must still meet the other lending guidelines such as credit history and credit scores.
6. Pull Cash Out for Home Improvements (Or other reasons)
Home values are on the rise.
Since the housing market began declining in 2007, many families have not been able to purchase a newer home. This means they might have had to stay put in their existing property and potentially postpone upgrades and other maintenance to the home.
Another reason people have stayed in their homes is because they simply did not know if they would be the next family to foreclose or sell their home through a short sale. So why bother putting more money into the property?
Now that property values are increasing, the home owners have more options. They can decide to sell and move up into a new home or stay and improve their existing residence.
If they plan to keep the property for the long term, they may soon be able to borrow money against the equity in the property for home improvements.
Of course, the cash out could be used for many other purposes, but home improvements make sense compared to purchasing a newer bigger home. A larger home may seem attractive, but the additional expenses that come with it may not be the best option yet.
Now that you know the different ways and benefits of refinancing your home, let’s take a look at how soon these options may be available for you.
Common Waiting Periods to Qualify for a Refinance after Bankruptcy
Here is a snapshot of how soon you may be eligible for a new mortgage loan after your bankruptcy. I have broken it down by three types of real estate loans for easy comparison.
1. Conventional Loans
Conventional mortgage lenders are generally requiring four years to have passed since your bankruptcy. There are different time requirements depending on your specific situation and the type of bankruptcy you filed for.
Chapter 7: Four years from the discharge or dismissal date. (2 years with extenuating circumstances, but your lender will need to approve that exception.)
Chapter 13: Two years from the discharge date, but 4 years from the dismissal date.
Visit http://knowyouroptions.com/refinance/overview to get more information about refinancing through conventional lenders.
2. FHA Loans (Government–insured mortgages)
FHA-insured mortgages are more lenient regarding your credit and previous bankruptcy. However, FHA lenders will also be reviewing your credit and payment history after the bankruptcy to determine the level of risk in making a new loan to you.
It will help if you have new credit cards and new reestablished credit.
Chapter 7: Two years from the discharge date of the bankruptcy.
Chapter 13: At least one year after the pay-out period under the bankruptcy. (Subject to additional conditions)
Visit FHA.gov for more information and resources on how government-insured loans work.
3. Private Money Loans
Private Money lenders generally do not have credit score requirements or specific waiting periods after a previous bankruptcy. You might literally be able to qualify for a private money loan in a matter of days after your bankruptcy has been discharged.
Private money lenders also review the bigger picture of your credit profile and financial position in order to analyze the risk in making a loan – just like the larger institutional mortgage lenders.
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